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Does the Board Engagement of Public Pension Plans Matter? (Journal of Financial Services Research)

In 2011 I began to hunt around for a Ph.D. research topic. What was on my mind? Corporate governance failures from the Great Financial Crisis for one. Another, flagging demographics and retirement security. Thirdly, the firsthand experience of working with asset owners, their boards, finance and investment committees, and having seen the mixed performance, some excellent, some not so hot, but constantly shifting over time.

Fourteen years, thousands of research hours, one Ph.D. dissertation, several articles, engagement with hundreds of organizations, many conferences and webinars, subsequent studies (2021 Benchmarking Study of Governance in Higher Education with Commonfund Institute), an online assessment tool and one book later, our team in the finance department at Marquette University published these findings in a top academic journal this week. It is with great pride that we share this work. This research began a national conversation on the role governance plays on driving mission-driven and financial-related outcomes over time. Since that time we have seen governance crises play out not only in the private sector, at the municipal and state levels, but also in our federal government, making the subject of this work in this field all the more urgent and compelling.

For further information and updates, see the Asset Owner Governance Project through the Marquette S-Lab.

Abstract

We examine whether the discretionary governance practices of pension board of trustees have a significant impact on the returns of the plan’s invested assets. We construct a unique database of board practices by analyzing meeting minutes of public plan board of trustees. Employing Principal Component Analysis, we formulate a pension plan Board Engagement Index to capture board dynamics beyond mere board size and composition. Our results demonstrate that pension funds characterized by a higher level of board engagement – reflected in higher index scores – exhibit enhanced fund performance. Our results are robust to endogeneity concerns. On an annual basis, one standard deviation increase in the engagement index corresponds to a 3.9% increase in benchmark-adjusted returns, everything else constant. Our findings underscore the substantial impact that board engagement can exert on a plan’s financial performance.

https://link.springer.com/epdf/10.1007/s10693-024-00440-y?sharing_token=1FuoIqekBPmoZ-R-PO5f1ve4RwlQNchNByi7wbcMAY6onb-vdjzKTIjTyLGTLrOzQGJDGvoBKRh4x741iRhyBMktAPeOpz_1yDesAeXWKPIIr2CO3Z3nFWMSaQOEP1tQtdeMAJbXK31dXluGT7TvKqZxlSiekil-vJDgYI7RG54%3D

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S-Lab Annual Report Released on the Eve of the Nexus Sustainability Leaders Summit

Letter from the Co-Director:

As Charles Dickens famously wrote in the opening line of his 1859 novel A Tale of Two Cities, 2024 has undeniably been “the best of times and the worst of times.” The year has been marked by profound challenges and notable progress in the realm of sustainability. In the United States, we have witnessed one of the most contentious presidential campaigns in recent memory and faced inflationary pressures unseen since the 1970s. Geopolitical instability has further complicated the landscape, with the ongoing Ukrainian-Russian conflict and escalating tensions in the Middle East. These turbulent conditions have set the stage for both significant setbacks and remarkable achievements in our global efforts toward sustainability.

The regulatory environment for Environmental, Social, and Governance (ESG) disclosures has seen considerable shifts. We have observed a notable decline in support for ESG proxy proposals, with BlackRock’s backing reaching a new low, and major asset manager like JP Morgan and BlackRock withdrawing from the Net Zero Alliance.1 Concurrently, the European Union’s Corporate Sustainability Reporting Directive (CSRD) came into effect, and the U.S. Securities and Exchange Commission (SEC) introduced new climate disclosure rules, only to face immediate legal challenges.

In addition, policy experiments under the Inflation Reduction Act encountered obstacles, with notable bankruptcies such as Fisker and SunPower highlighting the difficulties in the electric vehicle and solar sectors.2 A recent study revealed that only 63 of 1,500 policies were effective against climate change, primarily those involving carbon pricing rather than government subsidies.3 Meanwhile, the Earth continued to experience record-breaking temperatures and rising carbon emissions, with many Paris Agreement signatories struggling to meet their commitments.

Despite these hurdles, there has been significant progress in the renewable energy sector. According to BloombergNEF, 40 percent of global electricity was generated from zero-carbon sources last year.4 Mainland China emerged as a leader, achieving its solar and wind generation targets six years ahead of schedule, although it also significantly expanded coal-fired capacity. Solar and wind power contributed more than 90 percent of global energy capacity additions, and global wind capacity surpassed one terawatt. Brazil, with the cleanest power mix among G-20 economies, achieved 88 percent renewable power generation in 2023. Renewable sources, including wind and solar, comprised 17 percent of total electricity generation, with hydroelectric and nuclear power contributing 24 percent. Fossil fuels accounted for 57 percent of global electricity generation, but investment in renewables continued to soar, surpassing fossil fuels.

At the Sustainability Lab, our first full year has been marked by rapid progress and significant achievements. We formalized our partnership with The Water Council and expanded our annual Nexus Sustainability Leaders Summit, experiencing unprecedented levels of sponsorship from the Wisconsin business community and beyond. We established the Sustainable Finance Advisory Council (SFAC), which has contributed to the Forward Water+Energy initiative and the proposal for a “Super” Wisconsin Green Bank. Our Student Shareholder Engagement Program,

in collaboration with the Seventh Generation Interfaith Coalition for Sustainable Investing and the Marquette Endowment, was successfully piloted.

We also advanced research on asset owner governance and explored the intersection of mergers and acquisitions with sustainability factors, while advising the CFA Institute on its sixth edition ESG Certificate curriculum. Amidst these accomplishments, including launching a second sustainable finance course for master’s level students, I personally navigated the challenges of recovering from a broken leg. None of this would have been possible without the unwavering support of our advisory board, the Marquette staff, and our numerous partners and supporters.

As we conclude this milestone first year, we extend our heartfelt thanks to everyone who has contributed to our journey and success.

Christopher K. Merker, Ph.D., CFA

Co-Director, Marquette S-Lab Executive-in-Residence

College of Business Administration Marquette University

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Why Californians Have Some of the Highest Power Bills in the U.S. (WSJ)

Utilities are investing billions to upgrade infrastructure and build out green energy, passing budget-breaking costs to households; trying to keep the chocolate from melting

BORREGO SPRINGS, Calif.—California is doing all it can to expand renewable energy production and rebuild its electrical infrastructure after flaws led to a series of devastating wildfires. 

The state’s big utilities are spending billions to bury power lines and insulate wires, while at the same time moving quickly away from fossil fuels by building big solar and wind farms and transmission lines to carry the power. 

As a result, resident Jessica Simpson Nehrer, who lives in Borrego Springs, near San Diego, has seen her electricity bill for her ranch-style house soar. It hit $1,873.90 in June, far exceeding her $1,200 rent and around double what it was two summers ago. 

https://www.wsj.com/business/energy-oil/why-californians-have-some-of-the-highest-power-bills-in-the-u-s-a831b60e?st=dffqel35pudxsh2&reflink=article_email_share

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BlackRock Support for Climate, Social Proposals Hits New Low (FundFire)

The firm’s backing for such shareholder proposals plummeted from a high of 47% in 2021 to 4% over the twelve months ending in June amid a political backlash.

BlackRock has drastically cut back its support for proposals put forth by shareholders on environmental and social issues, the Financial Times reports.

The world’s largest asset manager backed just 4%, or 20 of the 493 environmental proposals put forward by shareholders in the twelve months ending in June. That compares to the firm’s peak support of 47% of ESG proposals in 2021, the FT reported, citing an annual stewardship report BlackRock released Wednesday.

https://www.fundfire.com/c/4602324/609264/blackrock_support_climate_social_proposals_hits?referrer_module=emailMorningNews&module_order=1&code=WTIxbGNtdGxja0J5ZDJKaGFYSmtMbU52YlN3Z05UYzNPREU0TXl3Z01UWTFNamMzTmprMk53PT0

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Racked by Extreme Heat, One Worker Died on the Job. His Story Is a Warning. (WSJ)

Justin “Cory” Foster, a lineman who often traveled to storm-ravaged communities to help restore electricity, was used to working in searing summer weather as he perched atop utility poles to install wires. But as the heat index climbed to 113 degrees Fahrenheit on a job in Marshall, Texas, last year, the temperature baked his body.

https://www.wsj.com/us-news/climate-environment/racked-by-extreme-heat-one-worker-died-on-the-job-his-story-is-a-warning-9fa063c6?st=zzchy9ikqbvb1xb&reflink=article_email_share

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Wildfire intensity rises across northern hemisphere (FT)

Wildfires burning across the northern hemisphere in parts of Canada, Russia and the US since the start of the summer have led to a surge in carbon dioxide emissions and smoke trail as their intensity rises. Scientists at international agencies have been tracking emissions and monitoring a significant increase in daily total fire radiative power, which indicates the intensity of the fires. Western Canada is enduring an “extreme fire year”, said the Copernicus Atmosphere Monitoring Service (Cams), with estimated emissions at levels comparable with the previous highest years of the past two decades, only surpassed by the record set in 2023.

https://www.ft.com/content/8a63bec7-048c-40fb-b3ae-717419f4469f

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World in line for hottest year as 1.5C limit breached for 12 months in a row (FT)

https://www.ft.com/content/31e565e9-e08a-42c7-90e6-6ccdc3dc47e0?accessToken=zwAGHTUyZgV4kc8x5WXp4IpCx9OQ5mzNw9xH4A.MEUCIQDctUhqPmb5ft3WHrHXUr8lHUma0wdneqi299PDUF_lsQIgIjMt2DyZ7FRkGKof22vitPPsxF9v8FwdNFnaWycnCE4&sharetype=gift&token=1384e775-fdec-40ff-a39a-e3653470343a

Scientists said that this year was on track to become the warmest on record as the global surface air temperatures breached the threshold of 1.5C for each of the past 12 months and seas had reached their warmest for 15 months in a row.

June was the 13th consecutive month to be the hottest on the books, the Copernicus Climate Change Service said. At a surface air temperature of 16.66C, this was 0.14C above the previous June high set last year.

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Microsoft invests in AI in Wisconsin and adds supplier climate requirement

Microsoft announces $3.3 billion investment in Wisconsin to spur artificial intelligence innovation and economic growth

https://news.microsoft.com/2024/05/08/microsoft-announces-3-3-billion-investment-in-wisconsin-to-spur-artificial-intelligence-innovation-and-economic-growth

Microsoft announced a broad investment package designed to strengthen the role of Southeast Wisconsin as a hub for AI-powered economic activity, innovation, and job creation. These investments include $3.3B in cloud computing and AI infrastructure, the creation of the country’s first manufacturing-focused AI co-innovation lab, and an AI skilling initiative to equip more than 100,000 of the state’s residents with essential AI skills.

“Wisconsin has a rich and storied legacy of innovation and ingenuity in manufacturing,” said Brad Smith, Vice Chair and President of Microsoft. “We will use the power of AI to help advance the next generation of manufacturing companies, skills and jobs in Wisconsin and across the country. This is what a big company can do to build a strong foundation for every medium, small and start-up company and non-profit everywhere.”

Tech giant reports 30% rise in emissions and says biggest challenge in meeting its own climate goals is reducing carbon footprint of supply chain

https://www.wsj.com/articles/microsoft-imposes-new-climate-requirement-on-suppliers-in-effort-to-lower-its-emissions-32169953?mod=djemSustainableBusinessPro

Microsoft will ask its main suppliers to use 100% renewable energy by the end of the decade, as it reported a 30% rise in emissions and acknowledged that its biggest challenge in meeting its climate goals comes from the construction of new AI infrastructure and tackling emissions from its supply chain.

Chief Sustainability Officer Melanie Nakagawa said the company will require “select scale, high-volume suppliers to use 100% carbon-free electricity by 2030” for goods and services delivered to Microsoft. The tech heavyweight said the requirements will be rolled out at the start of the 2025 fiscal year as part of an overall update to the company’s Supplier Code of Conduct.

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Dan Romito asks the tough questions on ESG regulation and the future of the energy transition.

Marquette S-Lab Co-Director and Head of ESG Consulting at Pickering Energy Partners recently presented at the Marquette graduate level Sustainable Finance class. Romito walked the class through the most pressing questions on ESG regulation and its impact on the energy transition.

https://marquette.hosted.panopto.com/Panopto/Pages/Viewer.aspx?id=cc058228-463e-45ab-ba23-b15c0108bbab